Compacted

On Friday, I have to confess
The Jobs report didn’t impress
The dollar reacted
By getting compacted
But later, dispelled the distress

This morning the dollar is still
Increasing in value but will
Undoubtedly find
The rally will grind
To a halt, as it battles uphill

It has been a distinctly uninteresting session overnight despite somewhat better than expected Eurozone data being released. In fact, the dollar has continued its Friday afternoon price action and rallied vs. almost every currency. A recap of Friday’s US data showed a decent miss by the headline payroll number, just 148K rather than the 190K expected, and even with revisions the data was weak. But as I had suggested, there was more concern about the AHE data, which printed right on the number, continuing to point to earnings growth of 2.5% over the past year. While that is slower than the Fed clearly wants to see, at least it is not decelerating. The market’s initial reaction was for the dollar to sell off sharply, with the euro jumping 0.3% in the first minute of trading, but it spent the rest of the day ceding those gains and actually closed lower. The euro’s decline has continued here this morning and as I type, it is down by a further 0.35%. What makes this so surprising is the data showing Eurozone Economic Confidence is at its highest level in more than a decade, while the harder data, Retail Sales being today’s example, continues to improve as well. I would argue the consensus view on the dollar this year is distinctly negative, with the rationale being the ECB will be more aggressive than currently priced, while the Fed will simultaneously slow down their tightening policies in the absence of inflationary pressures. You also know that I disagree with that outlook and expect virtually the opposite central bank outcomes along with a dollar rally. One week into the year it is way too early to tell who will be correct, but I have not changed my view at all.

As to the rest of the G10, the dollar is firmer here as well. Alongside the euro, SEK has also fallen 0.35% as concerns increase over house prices there. After what had been non-stop rally in prices for ten years, they have fallen 7% in the past three months and are forecast to decline further. Of course, like all other assets, their prices have been a direct response to the extraordinary monetary policy from the world’s central banks. Is this the canary in the coalmine? It is not uncommon for secondary markets to exhibit the first signs of change when trends are under pressure. Keep a close eye here.

The other thing that is somewhat unusual is that commodity prices are continuing their rally despite the dollar’s strength. Generally the two move in opposite directions, but not today. Let me say that if we continue to see commodity prices rally as they have been, inflation expectations are going to need to rise. You are also aware that I am quite certain that we will see higher inflation readings this year, which will drive policy around the globe. So it seems that we have some anomalous price action this morning. But remember, one day is an anomaly, and perhaps even two days, but if it continues, it starts to become a trend.

A brief tour of the emerging markets shows that the dollar is king there as well this morning, with only one currency of the twenty-four I watch, THB, showing a gain vs. the dollar while the rest of the bloc is lower. And the baht is only higher by 0.1% after news showing foreign investors buying more Thai bonds for a ninth consecutive session. Otherwise, the key decliners have been ZAR, down 0.90% after a major analyst indicated he thought the rand’s 16% rally over the past two months was excessive. It seems some profits were taken this morning. But then the rest of this bloc, across all three geographic regions, is lower by varying amounts as well. Today is simply a day to buy dollars!

After last week’s data deluge, we have much less to digest this week, but Friday is important:

 

Today Consumer Credit $18.0B
Tuesday NFIB Small Biz Optimism 108.0
  JOLTS Job Openings 6.025M
Thursday Initial Claims 245K
  PPI 0.2%
  -ex food & energy 0.2%
  Monthly Budget Statement -$46.0B
Friday CPI 0.1% (2.1% Y/Y)
  -ex food & energy 0.2% (1.7% Y/Y)
  Retail Sales 0.5%
  -ex autos 0.3%
  -Control Group 0.4%

While the Fed doesn’t use CPI in its calculations, it is still the most widely followed inflation indicator and the market will immediately factor in any surprise. While these are December figures, and so I don’t expect much variance, anecdotally I have seen a number of places raise their prices in the new year already, so I expect that next month’s data is ripe for a higher print. In addition to the data, we hear from eight Fed speakers this week, although they mostly hew from the dovish side of the spectrum. As such, I expect to hear a lot about why the Fed needn’t be in a hurry to continue tightening policy. But in the end, even the doves will need to respond if the data shows prices rising. And that is this year’s big unknown; just how fast will prices rise in 2018.

As to the market today, it is hard to get excited about much further movement. My sense is that the dollar’s rally is likely to stall for now, although unless we hear something new and surprising from one of today’s Fed speakers, I see no reason for the dollar to give back its gains.

Good luck
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